Posted by Malcolm Graham-Wood - Malcy's Blog
WTI $69.17 +16c, Brent $74.65 +90c, Diff -$5.48 +74c, NG $2.90 +4c
Oil has rallied modestly in the last couple of days as the market anticipated the Iranian sanctions starting up with phase 1 even though oil is not in the mix until November. Despite the protestations from other signatories from the nuclear agreement President Trump has made it perfectly clear that those who deal with Iran will not deal with the US.
The API inventory stats were as complicated as ever with a much bigger than forecast draw in crude oil of 6m bbls but a build in gasoline of 3.1m and in distillates of 1.8m which the market had expected to draw. The stock build doesn't surprise me too much, I reported last week huge refinery utilisation but the gasoline should have been flat. Let's see how the EIA numbers look tonight after they reported yesterday that US production growth this year is not going to be as much as expected.
A red letter day today for SAVP as they announce that they have signed a legally binding MOU with the Republic of Niger with a ‘commitment to realisation of the proposed early production scheme (EPS) utilising recent oil discoveries in the R3 portion of the R3/R4 PSC in the Agadem Rift Basin'. The agreement binds both parties to work together to ensure the EPS is realised.
The EPS envisages oil from Savannah's recent discoveries being delivered to the SORAZ refinery (owned by a joint venture of CNPC and the Niger Government) through the Agadem-Zinder pipeline (owned by CNPC), and the Government of Niger have agreed to facilitate commercial arrangements between Savannah and both SORAZ and the pipeline owner in order for Savannah's first production to be delivered, of course subject to the compatibility of Savannah's oil which will be addressed when they commence their well testing campaign (I expect later this year).
SAVP will provide a pre-feasibility study to the Government in relation to the discovered crude oil resources in the R3 area anticipated to be included in the EPS, and then within 90 days of finalising agreements between themselves, SORAZ and the third party infrastructure owner will submit to the Government an application for an Exclusive Exploitation Authorisation.
SAVP CEO Andrew Knott has in his statement indicated that with its significant bank of drill-ready exploration prospects that have similar risk profiles to those already drilled, the company should see significant reserve addition potential. This agreement is of such significance as it takes away a good deal of the worries of potentially stranded oil that some naysayers predicted, and whilst I expect ramp-up of production to be gentle it will indeed mean modest cash flow, quite possibly by the end of this year. What is more the exit route for crude is now via a 60km truck journey to the pipeline rather than a 700km one which was a possibility in earlier plans. This makes the crude discovered already in Niger to be much more profitable than the original study envisaged.
With the final note in the RNS stating that the completion of the Seven Energy assets is ‘on track for this quarter' these announcements should have gone a long way to demonstrating that the significant upside at SAVP should be converted in the share price reaction especially as Eridal-1 is drilling ahead at the moment.
An operational update from Faroe this morning which shows that everything is pretty much going to plan. Production in the period was 12,402 boed which was a bit light due to activity on a number of prospects but has since returned to 15,200 and the guidance has only dropped from 12,000-15,000 to 12,000 to 14,000 boed. The Iris Hades success has added 42 mmboe to 2C resources with an appraisal well commissioned for 2019.
Faroe has a fully funded, multi-field development programme under way with Oda drilling already in progress and the company has 6 E&A wells committed starting with Rungne. Net cash is a higher than expected £84m (£75m in December) and the company produced an unaudited EBITDAX of £76m in the first half. Faroe is well on the way to its longer term target of 35,000 boed by 2021/22 and remains one of the strongest plays in the E&P sector offering consistent increases in shareholder value over a long period of time.
I caught up with Jay Bhattacherjee last week to chat about the farm-out deal Aminex has done with Zubair and to try and understand why the market has cooled on the process. I think it is fair to say that the institutional holders are happier than the retail and within that band there are people who don't agree that it is quite as good as advertised.
It is also worth noting that when I first wrote up my views, before speaking to Jay I was a big fan of the deal and it has to be said that I still am. With the significant cash payment up front by Zubair and the carry on 3D seismic and drilling Aminex has had a liquidity moment with what is effectively a material unlocking of cash. The deal accelerates development and production from Ntorya and means that permitting etc could mean that the next well might be spudded by the end of this year.
With an initial target of production of 40 mmscf/d Aminex gets net cash flow of $10-12m pa but I suspect the arrival of the Zubairs means that a much higher production rate is likely in due course. Hence my original valuation of 10p which is predicated on substantial long term cash flow for Aminex. There have been some suggestions that Aminex raise the money and fund this huge prospect themselves which I put to Jay. He told me that they have explored all routes from equity to debt to off-take agreements but none of these were either available of produced the kind of deal they have come up with. Whilst I can see part of the bear case I think that this deal will eventually allow significant amounts of value to materialise for Aminex shareholders and accordingly I remain a long term believer in the company.
Owing to a flash blog yesterday the link to this week's Voxmarkets Podcast is here today.
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